The case against raising car prices

By Sherilyn Goh

Carmakers have been talking about increasing their car prices due to ringgit weakness. Is the ringgit all to blame? Or is it just a convenient excuse for increasing margins? Tiger lays out the case for not raising car prices.

While some car makers are talking about raising prices, others have stated that they won’t while still others are talking about a reduction in car prices. So how justified are plans to increase prices?

Earlier this week, UMW Toyota had announced that it will increase the prices for all of its Toyota and Lexus vehicles by 4% and 16% respectively, effective January 2016, to cope with the impact of a weaker ringgit.

Second national carmaker Perodua also said that it was looking at increasing the selling price of its car models if the plunge in the ringgit persists, as up to 10% of its car components are reported to be imported with their costs denominated in the US dollar. The ringgit has depreciated by about 20% against the greenback since the beginning of the year.

Other carmakers including Honda and Mitsubishi have also been reported to be contemplating the same, but nothing has materialised as yet.

The way Tiger sees it, when the cost of doing business increases, you either do the natural thing which is to increase prices of your products, or you work harder to boost sales volumes. And here is why Tiger thinks carmakers should keep prices where they are.

Perodua, the biggest national carmaker controlling one-third of the market – has the ability to do the latter, owing its success in part to government policies put in place to protect local car industries since the inception of Proton in 1985. Perodua which started producing cars in 1992 has also reaped these protective benefits over the years.

Why choose to increase prices when all these years consumers have been paying indirect taxes for choosing not to buy a Perodua, or a Proton? In 2013 for instance, Malaysian car buyers paid RM9 billion to government coffers in the form of excise duties for choosing foreign brands over national cars.

So what, really, would you make of a 2% increase in costs due to foreign exchange losses compared to being shielded from external competition all these years and gaining billions? This is essentially what gave Perodua the market leader position it enjoys in the local car market today, which makes it unfair for Perodua to increase prices at the expense of its captive market.

But less Perodua become too complacent, as it moves away from Proton in the market place, let it remember that non-national brands have overtaken national cars for the first time in 2014 to hold a combined market share of 53%.

Also, while the excise duty is here to stay, the automotive sector is expected to be more liberalised under its National Automotive Policy (NAP), and not to mention the Trans-Pacific Partnership (TPP) which could open up the local market to more competition should it come into effect by 2018.  

Toyota and Lexus have most of their costs denominated in their home currency which is the Japanese yen, which has fallen to multiple-year lows since December last year, when Japan practised massive quantitative easing to spur its slowing economy. Over the last year, the ringgit depreciated some 12% against the Japanese yen.

Toyota’s sales is also among the worst performing among carmakers lately, recording the highest year-on-year decrease of 24% in total industry volume among other brands in August. The reason cited by Kenanga Research was due to lack of exciting new models introduced.

This is why Honda took over the lead from Toyota in sales volume this year, with year-to-date July 2015 market share at 13.7%, compared to Toyota’s 12.1%. There have also been talks of a price increase by Honda, but nothing has materialised so far.

So what Toyota needs to do now is to boost sales by providing discounts or promotions, instead of hiking prices that would only turn their customers away. That is, unless they are trying to compensate for lost margins due to reduced sales volume and is not confident of achieving their bottom line targets for the financial year.

UMW Toyota is also the biggest shareholder of Perodua (with 38% share), effectively controlling the market via entry, mid level and high end cars under the Lexus models which also come under UMW Toyota’s flagship.

Lexus models compete with the premium marques, which could also explain why the margins of increase (16% – higher than the 12% fall in the ringgit over the yen in one year) are much higher than Toyota’s 4%, probably with the base assumption that the premium segment market is more inelastic to price changes. But is that the reality?

Mercedes-Benz Malaysia, during its results briefing for the third quarter of 2015, not only said that they will not increase prices for their cars, but that the premium car segment market leader is also now introducing variants of its C-Class models compliant with the NAP under reduced prices.

Mercedes Benz Malaysia – 51% owned by Daimler AG and 49% owned by Cycle & Carriage Bintang Bhd – has been doing fantastic in sales despite being in the premium car market, as their growth story seems to be going against the tides in the automotive market, recording a 109% year-on-year increase in car sales for this year’s third quarter, driven mainly by its locally produced models.

So what’s their secret to success quarter after quarter? Tiger is leaving that to you car aficionados. But what Tiger does understand is that being a big fan of the NAP, the German carmaker has since 2004 set up its local assembly plant in Pekan, which produces its best selling C, E and S class models. Variants of the best-selling C segments are now even introduced at reduced prices to give the carmaker a mass market appeal.

Under the NAP, foreign carmakers get tax incentives for its energy efficient vehicles or in exchange for certain parts localisation, which partly explains why the German marque did so well under its ex-CEO Roland Folger, something that Lexus can perhaps learn from.

Even luxury brands these days are trying to get more mass market appeal, showing that exclusivity is not the way to go. And it shows that if foreign carmakers cannot beat national brands in terms of pricing under protectionist policies, perhaps they should be more receptive to provisions under the NAP.

Toyota has a regional manufacturing hub in Thailand, with its assembled vehicles exempted from import duties under the Asean Free Trade Agreement.

Honda also has it manufacturing hub in Pegoh, Melaka. Its Jazz model complies with the requirements of Energy Efficient Vehicle under the NAP and hence is eligible for tax incentives, which could be the reason the model is being well-received. What Malaysians want all the more given the current dampened economic conditions is probably a good value for their shrinking ringgit.

According to independent economist Lee Heng Guie, the impact of the falling ringgit on import prices and the eventual pass-through on domestic price inflation will come with a time lag within 3-6 months when the producers and traders restock based on new contract pricing.

This is not to mention that the ringgit has been plunging for months now,  so companies with foreign exchange exposure should have reasonably made their respective hedging against currency fluctuations. Don’t tell Tiger a big company like Toyota, or any other companies with forex exposure for the matter do not do the same?

“We do not foresee price increase in the short to medium term. We are affected by the fluctuation in the ringgit but we constantly monitor the situation, and will try to the best of our ability to protect not only the company but also our customers,” Mercedes-Benz Malaysia’s vice president of sales and marketing Mark Raine told the media yesterday.

Asked if the carmaker is expecting compressed margins as a result of the depreciating ringgit, Raine said Mercedes-Benz Malaysia will adopt all financial instruments and measures available to compensate (for foreign-exchange losses) and maintain steady long-term price strategy.

Berjaya Auto Bhd – the official distributor for Mazda cars and spare parts in Malaysia – is also reported to be not raising prices of their products for the time being. Kenanga Research noted that Berjaya Auto has favourable hedging position from September to December at RM3.15/100 JPY.  

“As we move towards the end of the year, we are trying to hold back for customers. There is no point for us to increase the price under the current economic environment. If the price of everything starts to increase, it will not be good for the economic environment. So we will maintain the current selling price by reducing other expenses,” its CEO Ben Yeo told The Edge.

Hence the move of Toyota increasing prices at this moment (beginning 2016) seems to be just to make up for bad margins and lost sales. Currency fluctuations are part and parcel of doing business and should have been pre-empted with the drastic changes in global business environment with the crash in oil price starting December last year.

Like it or not, the local automotive industry is confronted with the problem of an increasingly saturated car market. With a population of just under 30 million, we have a high car ownership ratio, which stands at an estimated 3 cars for every 10 people, one of the highest in the region surpassing Thailand and Indonesia. It is no wonder that several carmakers are welcoming the idea of scrapping old vehicles in this saturated market.

In other words consumers are increasingly spoiled for choices in this demand-driven car market, so the call is really up to car companies: to raise prices or not to?

And by raising prices does it mean that prices will fall as the ringgit strengthens? Most unlikely, according to the economic principle of price stickiness. So why punish Malaysians more when their purses are already bleeding, and when car companies have reaped big profits during good times?

Bad move, in Tiger’s view. With all that is doom and and gloom with the ringgit and lacklustre consumer spending , the least consumers could ask for is more value for their hard-earned money. So why raise prices at this time instead of doing consumers a favour by cutting prices to boost sales?

Malaysian Automotive Association (MAA)’s president Aisha Ahmad puts it well. “Increasing prices is not going to boost sales. On the contrary, it will worsen the situation as consumers are already tightening their belts due to inflationary pressures,” she was quoted in a news report.

Raising prices at at this point will only force consumers to further hold back on their planned purchases and aggravate the slowdown in car sales. Instead of looking at price hike as an immediate solution, perhaps carmakers should come up with avenues to make their products more competitive in terms of pricing and quality.

Tiger is no textbook economist but economics is after all the study of human behavior. But then again, what does a feline know about fellow human beings?

Tiger, too, is tempted to go for a Mercedes-Benz at the moment. And wonders how a luxury marque could be doing so well during such trying times.

GRRRRR!!!